Hi All,
I am trying to determine the best way to borrow money for finishing my basement. I am debating a HELOC at 7% vs a Fixed Home Equity loan at 6%. I intend to borrow around $40,000. I understand with a Fixed Home Equity loan you get all the money upfront and have a fixed payment based on the term of the loan, and that a HELOC your payment varies based on the term and how much of the loan you have outstanding.
For this exercise, let's assume I borrow $40,000 upfront on both loans. My intention is to have either of these loans paid off within three years, likely shorter. I will be able to throw large sums at the loans each month, with some months being higher than others.
Which of these options will I pay the less interest on? I have utilized a couple of excel amortization templates and it appears the Fixed Home Equity loan will result in lower total interest being paid. These templates assume the interest is calculated based on on the outstanding principal balance. Is my understanding correct on this? In that the interest portion of the payment will keep reducing as I pay the loan off quicker? I am not solid on my understanding on how the interest portion of the payment is derived.
I appreciate any feedback.
original posted by JBergman15 to r/personalfinance on Sat, 06 Apr 2024 16:01:00 GMT.